Gusher

Gusher.  Stocks rallied yesterday on hopes that the President can work out a deal with the Saudis and the Russians to cut crude production.  More than 6 million Americans filed for unemployment insurance last week, the largest weekly gain on record.

 

N O T E W O R T H Y

 

Energetic rise.  Yesterday’s rally in stocks was an interesting one. Stocks began the session in positive territory but quickly gave up ground in the wake of a record weekly jobless claims number which came in larger than expected.  The rut didn’t last for long as President Trump to CNBC and later tweeted that he had spoken to the Saudi Crown Prince who spoke to Vladimir Putin and that they were in talks to lower crude production by as much as -10 million barrels a day.  A follow-up tweet teased that the cut could be as high as -15 million barrels. Of course there were denials by the Russians, but the Saudis have called for an urgent OPEC+ meeting and it looks like that may happen.  Basically, there are probably negotiations going on in the background, which is good. WTI Crude Futures saw their largest single-day rise on record, climbing by +24.67%.  The Energy sector got a boost as well, climbing by +9.07% yesterday. Assuming that peace can be reached between the Saudis and Russians and that oil production could be cut, will it be enough to help prices get back to where they were?  More importantly, will the supply cut help the hemorrhaging energy sector? Many traders are skeptical despite yesterday’s bump.  For one thing, demand for crude has dropped significantly as the world shelters in place waiting for the pandemic to end.  It is estimated by experts that the decrease in demand may have contributed as much as -$25 loss per barrel in crude’s recent slide.  Energy experts estimate that current daily supply is exceeding demand by as much as 25 million barrels, so even a -15 million barrel cut may fall short.  There is still very little clarity on what will happen next for crude.  The uncertainty caused crude futures to drop initially overnight but have since rallied and are back in the green this morning.  The price war between the Saudis and Russians causing the precipitous drop in crude oil prices and energy companies came at a bad time, confounding the economic slowdown associated with the Coronavirus and adding uncertainty to an already uncertain situation.  The reality is that it is likely that not only the Russians and Saudis, but also other oil producing nations to cut back their production at some point regardless of the brinksmanship.  With such a large supply glut, prices of storage start to go up eating into already slimming margins.  Both the Saudi and Russian economies are highly dependent on oil production, so we can expect that even they will appreciate some stability at some point.  Does this mean that the energy sector will finally turn around?  It is too early to tell, but if you look at the sector as whole, it has underperformed the broader S&P500 over the past 10 years (more significantly in the past 5), giving up -46.7% versus the 114% gain for the S&P.  It is clear from this divergence that the industry is in a state of change, which preceded this latest price war. Things will pick up again, and only time will tell.  How much time is still the big wild card.

 

Not working.  Yesterday’s Department of Labor release of initial unemployment claims was a real eye-opener for some. Economists were expecting the weekly number to come in at 3.73 million, in itself a big number, but were surprised when the actual print came in at 6.648 million. They were surprised… but not completely, which is probably why stocks were not harder hit in the opening of the session.  If you look at the statistics of where the new claims came from in the past three weeks, you find that not all states were created equally. Pennsylvania was hardest hit, followed by Nevada, and Michigan rounding up the top three.  Each of those saw around 10% of their workforces file for unemployment.  California on the other hand, which was one of the first states to mandate lockdowns, only saw a decrease -5.7% of its workforce.  It is still early in the economic pause and many expect the topology of the job losses to change, if not grow significantly in the weeks and months ahead.  Today we will get the always-closely-watched monthly employment situation numbers from the Bureau of Labor Statistics and economists are expecting that it will show that Non-Farm Payrolls decreased by -100 k jobs.  This would represent the first monthly drop since 2010 as the country emerged from the financial crisis.  The number will almost certainly be negative and will possibly be larger than expected, but some perspective is warranted here.  The numbers only reflect job losses through the middle of March, which is when the survey was taken.  More importantly, the mounting job losses are a result of a mandatory icing of businesses which should only last until the virus is contained.  Brighter days are ahead for certain.  Let’s hope they come quickly.  Stay positive!

 

THE MARKETS

 

Stocks rallied yesterday, helped by beleaguered energy stocks which got a boost from comments by President Trump.  Hopes for an end to the crude oil price war powered the energy sector and cast a positive mood on investors who were looking for some positive news in a sea of troubling pandemic growth numbers.  The S&P500 climbed by +2.28%, the Dow Jones Industrial Average advanced by +2.24%, the Russell 200 traded up by +1.29%, and the NASDAQ Composite Index added +1.72%.  Bonds also climbed and 10-year treasury yields gained +1 basis point to 0.58%.  The VIX is at 51 this morning after spending much of last week with a 60 handle.  That means volatility is coming down and that we expect daily moves to be in the +/- 3.2% range.  Crazy, but that is far less volatile than a few weeks back.

 

NXT UP

 

– The Bureau of Labor Statistics will release Non-Farm Payrolls (March), which is expected to have fallen by -100 k jobs.  The Unemployment Rate is expected to be 3.8%, up from last month’s 3.5%.

– Markit Services PMI (March) is expected to have fallen from 38.5 from 39.1.

– ISM Non-Manufacturing Index (March) may have fallen to 43.0 from 57.3.

– Next week we will get inflation numbers, sentiment indicators, and FOMC meeting minutes. Check back on Monday for calendars and details.

daily chartbook 2020-04-03

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